Buying targets : development - vs - non development

[Patosan]

We have started down the development road on our prior POR, before deciding to actualy develop we bought a house as a 2nd IP last year. Having gone through the thought process of whether or not to develop and deciding yes, I'm in the frame of mind that future purchases should also be made with development in mind. Oh yes we intend to keep and HOLD everything within our trust structure.

So buying to develop and hold is always better than simply buying a non development opportunity.
But hold on Paddy my son ... it can't be that simple, can it ?

So which is best ?
What factors need to be considered ?
When could a house produce a better return than development ?
Are developments suited more for certain areas ?
Is it a case of once you try it ... you can't go back ?

 

[TheBacon]

Pros and Cons

Hi Paddy,
I think as with all investment decisions the end product or goal is the most important aspect, and the numbers must work. So regarding buying for development or buying a single residence with no development.....

What will be the outcome of your developments?
1. Will they be worth more than the money you put in? For example; if you're PPOR is worth (say) $300k as is, and you subdivide and build another house at the back for $150k, will the two houses now be worth $450k? If this is NOT the case, is development worth it?

2. Will you be able to get extra rent? If you can currently get $300/wk, and you spend 150k, will you be happy with $450/wk or will you get more?

In each of the two above I'd say the situation has not changed except the investor has put a lot of time into the project for no actual gain. In my opinion gains need to be a bit higher than this for redevelopment to be feasable.

If you can develop your old PPOR and sell (or re-value) for $550k then it would seem to be worthwhile, in effect you've earned $100k !! If you could get a combined $550 or more per week in rent for the above example then also it would seem a good deal.

If the numbers work for your situation and end goal then its worth it.

Good luck and let us know how it all goes.

TheBacon
Disclaimer: this poster is theory rich and experience poor, take all advice given as not worth the electricity used to display it on your screen. Also, sorry for not directly answering your question.

 

[Patosan]

Hii TheBacon,

With respect to my Prior POR there is no question about the numbers. We will demolish the existing house and build 3 T/H. The result will be almost treble in value and more than treble in rent for a total cost of much less than the current value of approx $500k. No way we'll sell, instead use the increased equity and cashflow for further purchases.

So as you see I'm VERY happy to develop it, and am considering only buying properties to do the same thing. My question is about FUTURE purchases.

Will they usually be just as lucrative ?
Of course the correct entry price will be a contributing factor, but what are the other factors ?
Does this not work so well in cheaper or more expensive areas ?
I'd prefer to stay with the middle to upper end of the market since I believe one has less trouble with tenants, plus the capital gains are garanteed. What are evryones views on this ?

 

[Carmel]

Will they usually be just as lucrative ?

Key factors are the end sale value, the number of properties you can get on the block. Multiply # of properties times sales cost = total project value (never mind whether you sell them or not). Now subtract costs - to get planning, to build. If you aren't left with at least a 25% margin, it's not worth the risk.

Yes it's lucrative, but it is risky. Someone I know took the agent's word ('you'll get 4 on this block!) and then found the council would only allow 2. To say it's a financial failure is to understate the case - your 'lucrative' project can be totally blown. If you buy for a reasonable price, and if you can get planning permission(DA approval), and if you can get the number of properties on the block that make it worthwhile, and build them for a price that leaves you a good margin to cover the risks, then yes.

Another possibility is buy, get planning permission, and then onsell to a builder/developer, & take your gain in the value you've added to the property.

Does this not work so well in cheaper or more expensive areas ?

Well, building costs are the same, on the whole. A 3 bedroom townhouse in a cheap area or expensive area is going to cost roughly the same to build. The level of fixtures & fittings varies (eg, in flush suburbs one puts in even snazzier fittings), but general building costs remain similar. What are they worth? What can you sell them for? Can you sell for lots more if they're driipping in marble & gold taps? If so, what do marble & gold taps cost? Feasibility study is key.